Shale energy resources driving resurgence for ethylene industry

The abundant supply of North American shale energy resources
is proving to be not only a boon for exploration and production
(E&P) companies and energy consumers, but it is also
changing the profitability landscape for the continents
ethylene producers. According to a recently published report,
these shale energy resources are driving chemical industry job
growth, low-cost ethylene production, significant
profitability, and a competitive resurgence for the
continents producers of ethylene, one of the most
essential building-block chemicals in the petrochemical
industry.1

Renaissance for North American producers

In the US, due to the forecasted low-cost feedstock scenario providing for
globally competitive economics, nearly 11 million metric tons
(MM mt tons) of new ethylene capacity has been announced for
North America, which is a significant amount of new capacity
given the lack of any investment activity for more than a
decade. This news is a welcome development for ethylene
producers in the region, who were, until recently, executing
plans that included capacity closures and asset
consolidation.

Not only does this increased capacity mean more low-cost
production to both domestic and export markets, but it also
means that new, long-term, highly skilled and well-paying jobs
will be added in the US, including operators, engineers and maintenance personnel. According to
industry research, for every one of these chemical jobs added,
three others are created elsewhere, so the job market impact is
considerable. Pennsylvania, Ohio and West Virginia are several
of the US states likely to see petrochemical job growth, thanks to
shale energy resource availability.

Reverse trend

The US ethylene industry is experiencing a complete
turnaround. Five years ago, the industry was trying to
determine who was going to shut down capacity. Now the US
ethylene industry is running at near-maximum capacity
utilization and is seeking to add significant increments of new
production.

As a result of increasing the availability of low-cost feedstocks, there is a tremendous
amount of capital investment underway, including new
infrastructure needed for feedstock supply, ethylene and
ethylene-derivative capacity, and new logistics investments to
support higher levels of ethylene-derivative exports. Present
forecasts are calling for the first wave of new investment to
start up as early as 2016. Whats exciting for the
long-term health of the industry is that many of these
investments are not just being made by US-based producers, but
also from producers based in other regions, including the
Middle East, Asia and Europe.

Bellwether effect

Why are these developments in ethylene capacity additions
and production so important? Quite simply, it is because
ethylene is the bell weather product for assessing
the health of the petrochemical industry. Considered the
workhorse of the petrochemical industry, the ethylene market is
by far the largest market of the basic petrochemical building
blocks, including olefins, aromatics, chlor-alkali and syngas
chemicals.

Polyethylenewhich is the largest ethylene-derivative
market, consuming nearly 60% of all ethylene producedis
used primarily in a wide variety of nondurable goods
applications such as packaging materials. Ethylene oxide (used
in antifreeze, polyester fibers and detergents), ethylene
dichloride [used in polyvinyl chloride (PVC) films, coatings
and pipes], and ethylbenzene/styrene (which is used in
polystyrene packaging and ABS resins) are also important
ethylene consumers. The ethylene steam-cracker typically
represents the heart of
a petrochemical complex.

The ethylene industry tends to be a very cyclical industry
in terms of profitability. However, in the US, low regional
ethane prices are supporting high ethylene margins and are
creating a very profitable environment for producers, despite a
global oversupply situation. According to new research, ample
supplies of natural gas liquids from shale development are
keeping ethane prices low relative to other steam-cracker feedstocks.1 As a result,
US ethane-based producers experienced excessively strong
profits in 2012, which contrasted with naphtha-based producers
in the US and in other parts of the world.

These US capacity additions will bring much more supply than
the domestic market demands, so there will be significant
quantities of higher-value ethylene derivatives exported to
Asia, where demand is greatest. This supply resurgence is
causing a substantial shift in ethylene-derivative trade
patterns, to the benefit of North American producers.

Global market

The global demand for ethylene reflects a mixed demand
growth environmentrapid expansion in developing regions and
slower growth in developed regions. After contracting
considerably in 2008, world ethylene demand is forecast to be
approximately 135 MM mt tons in 2013, which is higher than the
previous demand peak of nearly 130 MM mt tons in 2012. In the
next five years, global ethylene demand is forecast to grow at
more than 4%/yr, reaching nearly 160 MM mt tons by
2017.1

Asian market

Demand in Asia, particularly China, continues to grow since
Chinas chemical industry remains unable to meet the
rapidly growing domestic consumption requirements. Sharp
increases in consumption, stemming from Chinas rapid
industrialization, have spurred the development of numerous new
domestic ethylene and derivative complexes that are either
under construction or planned for the next
five years, including several coal-based facilities. The emergence of coal as
a potential olefins feedstock in Northeast Asia,
however, warrants close monitoring.

As a result of high oil prices in the past several years,
there has been tremendous domestic interest to further develop
and utilize the abundant coal resources in China. Although the
investment involved is often massive, the operating costs of
the coal-to-olefins units will be very low, and the units will
be competitive compared to domestic naphtha-based steam-cracker
complexes, as well as most imports of olefin derivatives.
Assuming that Chinas strong economic growth can be
sustained, this nation will continue to be a major target for
petrochemical and derivative exports originating from the
Middle East, other parts of Asia and North America.

The net-equivalent imports of ethylene and ethylene
derivatives into Northeast Asia increased significantly in
2012, reaching an estimated 8.8 MM mt tons.1 That
trend is expected to continue, with the net deficit expected to
approach 10 MM mt tons by 2017 and to exceed 15 MM mt tons by
2022.

With the opportunities and challenges presented by this
rapidly developing abundant shale resource in North America,
there is doubt that the industry will continue to witness the
snowball effect of investments that are sure to follow. Refining and petrochemical
investments are tied to midstream investments, as well as to
other transportation, storage and shipping investments.
Increasing capacities at individual petrochemical facilities add high-paying and,
equally important, long-term jobs that help fuel local
economies and small businesses that, in turn, support the
workers who operate these facilities.

It is an exciting time to be a part of this industry, but
also an opportunity for the many professionals who work in this
industry to educate and remind our fellow consumers about the
positive impacts of the shale energy developments happening in
North America, but also the inter-connected petrochemical value chain that helps
drive much of both the US and world economies, and delivers
products that enrich and enhance daily life.
HP

The authorMark Eramo is vice president,
chemical market insights, at IHS Chemical, a leading
provider of information, insight and analysis for the
global chemical industry. He oversees the chemical
market insight teams that provide in-depth market
research and analysis on nearly 300 chemical and
plastics products. Mr. Eramo joined IHS is 2011
through the acquisition of CMAI, where he was
employed 14 years. Before joining IHS, he worked for
more than 12 years in the petrochemicals, vinyls and
surfactants industries with Vista Chemical Co. Mr.
Eramo holds a BS degree in chemical engineering from
Cornell University.

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